Fearing Crisis, EU Calls for Pension Reforms

December 17, 2002 (PLANSPONSOR.com) - With a pension
crisis looming in some member countries, the European Union
Commission is now pushing reforms, such as raising the
retirement age and encouraging the creation of investment
funds.

According to a Dow Jones news report, the
commission warned about the consequences of an aging
population in its first comprehensive evaluation of all
15 EU pension systems where four workers now pay for each
retiree. By 2050, it will be only two, Dow Jones
said.

“This report will help member states to push
forward the reforms necessary to secure adequate and
sustainable pensions over the long term,” Social Affairs
Commissioner Anna Diamantopoulou said, according to Dow
Jones.

A Demographic Time Bomb

The demographic time bomb will undermine
traditional state pension systems. Under the state
pay-as-you-go systems, contributions made by workers
aren’t invested. Instead, they are used immediately to
pay for current retirees, Dow Jones said.

“Our job is to find ways of preventing these
demographic developments translating into a pension
disaster, either in the form of poverty among older
people, or in the form of unbearably high contribution
and tax rates,” the EU report said, according to Dow
Jones.

Since many governments are already running public
deficits, the Commission said the private sector must be
encouraged to participate in pension reform.

The EU’s three biggest economies, Germany, France
and Italy, face the largest challenges, according to Dow
Jones. All three rely on state-run pension schemes. The
Netherlands and the UK, which make more use of company
and individual pension plans, are in much better
shape.

France is Worst Off

France faces the most immediate crisis. Its overall
debt is close to the EU limit of 60% of gross domestic
product and it will probably break the 3% of GDP deficit
limit next year.

The extensive state pension system leaves little
room for funded company or private pension plans. France
needs to increase its employment rate, particularly among
older people, the commission said. Only 31% of the people
between 55 and 64 are working. The average retirement age
is 58.7 years, Dow Jones said.

Germany isn’t faring much better. Despite some
reforms last year, “major financial challenges persist,”
the commission said. The government made efforts to
discourage early retirement, but “this can’t be relied
upon to guarantee the financial balance of the pension
system,” it added.

Italy started major reform in the 1990s designed to
reduce the pension levels. But contributions to state
pensions still make up 32.7% of an employee’s
salary.

On the other end of the scale are countries like
the Netherlands and the UK Their public finances are
sound and governments rely more on pension plans that
invest contributions in securities. The Dutch company
pension plans are more developed than anywhere else in
the EU This is thanks to agreements between unions and
employees that ensure mandatory coverage of at least 91%
of all employees in 2001.

In the UK, with low debt levels of around 37% and
small deficits, future sustainability of pensions is
“well under control,” the commission said.